Unemployment and Inflation Macroeconomic Measurement, cont.

Unemployment The Labor Force: All adults 16 and older who are able and willing to work. The Unemployed: The percentage of the labor force that is without a job.

Unemployment Why unemployment figures you hear may be misleading: Unrealistic wage expectations Unrealistic wage expectations Discouraged workers (jobless) are not counted Discouraged workers (jobless) are not counted All part-time workers are considered fully employed All part-time workers are considered fully employed

Unemployment Unemployment Insurance: A government program A government program Your employer contributes on your behalf Your employer contributes on your behalf Acts as an income replacement program for a limited time should you become unemployed through no fault of your own Acts as an income replacement program for a limited time should you become unemployed through no fault of your own

Unemployment Unemployment Figures: How unemployment rates are calculated How unemployment rates are calculated Natural Rate of Unemployment Natural Rate of Unemployment Average rate Average rate Current rates Current rates Highest recorded rate Highest recorded rate

Unemployment Benefits of Unemployment: Easier to match up workers with jobs Easier to match up workers with jobs Employers have better selection Employers have better selection Disciplinary benefits to firms Disciplinary benefits to firms

Unemployment Costs of Unemployment: Loss of output and income Loss of output and income Decreased quality of human capital if unemployment is prolonged Decreased quality of human capital if unemployment is prolonged Increased crime rate Increased crime rate Loss of self-esteem Loss of self-esteem

Unemployment Types of unemployment Types of unemployment Frictional Frictional Structural Structural Cyclical Cyclical Seasonal Seasonal See worksheet packet!

Inflation A general rise in the level of prices A general rise in the level of prices Does not mean all prices are rising at the same time Does not mean all prices are rising at the same time Not the result of a one-time shock Not the result of a one-time shock

Inflation Deflation Deflation A general decline in the level of prices A general decline in the level of prices Rarely occurs Rarely occurs Indicates a serious recession Indicates a serious recession

Inflation Disinflation Disinflation A decrease in the inflation rate A decrease in the inflation rate Generally a sign of a healthy economy Generally a sign of a healthy economy

Inflation Goal is to achieve price stability Goal is to achieve price stability Nominal vs. Real Income Nominal vs. Real Income

Inflation Types of Inflation Types of Inflation Demand-Pull: Spending increases faster than output can keep up with – “too many dollars chasing too few goods” Demand-Pull: Spending increases faster than output can keep up with – “too many dollars chasing too few goods” Cost-Push: results from an increase in costs that cause producers to produce less Cost-Push: results from an increase in costs that cause producers to produce less Expected Rate (1-2%): caused by rising resource costs Expected Rate (1-2%): caused by rising resource costs Hyperinflation: extremely rapid rise in prices, very rare Hyperinflation: extremely rapid rise in prices, very rare

Inflation Measuring Inflation Measuring Inflation Allows you to tell if your real income rose or fell in a given year Allows you to tell if your real income rose or fell in a given year Price Index: a comparison of the general level of prices in a given year with the prices of an earlier year Price Index: a comparison of the general level of prices in a given year with the prices of an earlier year

Inflation Consumer Price Index (CPI) Consumer Price Index (CPI) The most widely reported measure of inflation for cost of living The most widely reported measure of inflation for cost of living Measures a market basket of about 300 goods and services purchased by an urban family of four Measures a market basket of about 300 goods and services purchased by an urban family of four

Inflation Producer Price Index (PPI) Producer Price Index (PPI) Reports on resource prices to producers Reports on resource prices to producers A leading indicator of consumer prices A leading indicator of consumer prices

Inflation Effects of Inflation Effects of Inflation Who is hurt and who is helped? Who is hurt and who is helped? See worksheet packet! See worksheet packet!

Putting GDP, Unemployment and Inflation together and creating a picture of economic conditions. THE BUSINESS CYCLE

Economic Growth Historically, we have experienced tremendous growth Technological Progress Rapid increases in productive capacity Achieved the highest standard of living in the world

Economic Growth Long-run growth has not been steady  Interrupted and complicated  Caused by unemployment and inflation

The Business Cycle Defined The recurrent ups and downs in the level of economic activity that extends over several years.

The Phases of the Business Cycle Vary greatly in duration and intensity

The Phases of the Business Cycle Expansion (Recovery) Spending increases Output (GDP) increases Unemployment decreases Incomes increase Price level (inflation rate) increases

The Phases of the Business Cycle Peak (Prosperity) Spending and income at a temporary maximum Output (GDP) at full-employment Unemployment at the natural rate Price Level (inflation rate) high

The Phases of the Business Cycle Contraction (Recession) Spending decreases Output (GDP) decreases Unemployment increase Incomes decrease Price Level (inflation rate) decreases

The Phases of the Business Cycle Trough (only if very prolonged, becomes depression) Spending and incomes bottom out Output (GDP) at lowest levels Unemployment at highest levels Price Level (inflation rate) at expected rate

What causes Business Cycles? External Causes Population changes Inventions/innovations Wars/political events

What causes Business Cycles? Internal Causes Consumer spending Investment spending Government spending Net exports (exports – imports) GDP = C + I + G + Xn